Reclamation Bonding Requirements at the Western Regional Coordinating Center
This document provides general information about the Office of Surface Mining Reclamation and Enforcement/ Western Regional Coordinating Center's (OSM/WRCC) bonding requirements for surface coal mining operations. These requirements apply to mines permitted by OSM on Indian Lands and in Washington State which is a Federal Program State.
June, 2002
Prior to OSM/WRCC issuing a mining permit, the applicant must post a reclamation performance bond. The Surface Mining Control and Reclamation Act of 1977 (SMCRA or the Act) requires that a bond be filed after permit approval and prior to permit issuance. The bond ensures that OSM/WRCC will have funds to reclaim the site if the permittee fails to complete the reclamation plan approved in the permit. Bonds are conditioned upon the permittee's faithful performance of all the requirements of SMCRA, the regulatory program, the permit, and reclamation plan.
Bond Instruments:
OSM's rules at 30 CFR Part 800 recognize three major categories of reclamation bonds: corporate surety bonds, collateral bonds (cash; certificates of deposit; first-lien interests in real estate; letters of credit; federal, state, or municipal bonds; and investment-grade securities), and self bonds (legally binding corporate promises with or without separate surety, available only to permittees who meet certain financial tests). To remain qualified under OSM's self-bonding rules, self-bonded permittees must maintain a tangible net worth of at least $10 million, possess fixed assets in the U.S. of at least $20 million, and either meet certain financial ratios or have an "A" or higher bond rating.
Collateral posted as bond must be owned solely by the permittee, be free of all liens, and be valued at current market value, not face value. OSM/WRCC is required by the bonding regulations to reduce the market value of collateral by a margin sufficient to cover OSM's costs to liquidate the collateral in the event funds were needed for reclamation.
Subject to OSM/WRCC approval, a permittee may post any combination of bond types and instruments recognized under the Federal regulations provided the total sum equals the required reclamation bond amount at all times. OSM has prescribed bond forms that must be used. The most commonly used bond forms are below. Contact the applicable Mine Team for help with a particular kind of form. Each type of bond has a unique form. Each form must meet the requirements of the Federal regulatory program at 30 CFR Part 800. Depending upon the kind of bonding instrument used, other statutes and regulations may apply such as standard contract law, property law, the Uniform Commercial Code, banking law, and surety law. The providers of the bonds (surety companies and banks) are subject to the laws of their regulators: State insurance commissioners, State banking examiners, and the Comptroller of the Currency. These regulators administer State surety law and State and Federal banking law.
Some bond instruments such as certificates of deposit are negotiable instruments that are secured off-site in a bank safe-keeping department. All of OSM/WRCC's bonding documents are systematically filed and protected in a fireproof safe to protect them from loss, theft, or fire. OSM/WRCC tracks the status of its bonds in a database associated with mine permit data.
Reclamation bonds are financial instruments with
unique attributes and requirements. As mentioned above, some instruments are the pledged
assets of a mining company (cash, real estate, government securities). Some instruments
are guarantees of a permittee's performance (surety bonds). Other instruments provide
evidence of a deposit of cash (certificates of deposit) or the existence of a line of
credit (letters of credit). All bonds submitted to OSM/WRCC for Indian Lands permits and
Washington State permits must be made payable to the United States Office of Surface
Mining Reclamation and Enforcement. In OSM/WRCC's experience, surety bonds are the most
frequently used form of reclamation bond posted for Indian Lands mines and Washington
State mines.
A permittee wishing to post a corporate surety bond or letter of credit may apply at a surety company or bank respectively. A surety company must be licensed in the State where the operation is located. A bank must be organized to do business in the United States. A surety company must execute its bond using the OSM/WRCC's surety bond form. If a bank issues a letter of credit, the document must be prepared on the bank's safety paper and letterhead using the OSM/WRCC letter of credit language. No other language is acceptable. Letters of credit must be irrevocable during their terms [one to five years]. Surety bonds must be noncancellable except for coverage on undisturbed land with OSM/WRCC's prior approval of the cancellation.
The surety or bank's decision to issue a surety bond or letter of credit will be based on the surety company's or bank's analysis of the permittee's credit rating, business experience, and net worth. Some surety companies and banks require full or partial collateral from the permittee and an indemnity agreement. The indemnity agreement requires the permittee to reimburse the bank or surety company for any forfeited amount the bank or surety company paid to OSM as a result of bond forfeiture. The permittee also pays an annual premium or fee to the surety company or bank. Unlike premiums for insurance , the premiums for surety bonds are not based on the risk of a claim being filed. Surety bonding is a credit transaction rather than an insurance transaction. Therefore, the annual premium consists of a percentage of the bond amount. The Surety Association of America recommends average premium rates to the surety industry and individual surety companies establish premium rates based on specific underwriting criteria. The annual fee that the permittee pays for a letter of credit is based on a percentage of the letter of credit amount. When a surety company writes a surety bond it guarantees the permittee's performance of reclamation, compliance with the Act and regulations, and compliance with the permit. If the permittee does not reclaim the site, the surety company must pay the bond sum to OSM. In turn, OSM may allow a qualified surety to perform the reclamation in lieu of paying the bond amount. However, the surety must comply with all reclamation requirements of the approved permit and regulatory program, including the revegetation responsibility period. Corporate surety bonds posted to meet SMCRA bonding requirements at Section 509 are noncancellable, even for the permittee's failure to pay premiums or bankruptcy of the permittee.In some instances, surety bonds have been issued by individuals fraudulently posing as representatives of legitimate surety companies. To avoid fraud, OSM/WRCC verifies each surety bond with the home office of the surety company by using the Surety Association of America's Obligee's Guide, which can be viewed or downloaded. When mining Federal property (leased Federal coal or land in Federal surface ownership), and when a Federal agency is the payee (obligee), corporate surety bonds may only be accepted from surety companies that are listed in the U.S. Department of the Treasury's Circular 570, which is updated annually on July 1 and can be viewed and downloaded through the Internet. Circular 570 also provides a per-bond underwriting limitation for each listed surety company, and shows the States where the surety company is licensed.
Permit Area Bonded:
Reclamation performance bonds are posted to cover all operations during the term of the permit. Prior to permit issuance, the permittee must post a bond to cover one of the following areas:
The entire permit area;
The initial area of land to be affected under a cumulative bond schedule; or
The initial area of land to be affected under an incremental bond schedule.
Cumulative and incremental bond schedules must be approved by OSM/WRCC should the permittee select one of those options. Under either a cumulative or an incremental bond schedule, the permittee must post additional bond monies before affecting lands in succeeding increments or additional lands in accordance with the approved cumulative schedule.
Amount of Bond:
OSM/WRCC establishes the amount of bond required based upon the permittee's estimate of reclamation costs and OSM/WRCC's independent analysis of the reclamation costs involved if a third party were contracted by OSM/WRCC to complete the reclamation plan in the event of bond forfeiture. The reclamation cost estimate generally reflects reclamation costs at the projected point of maximum reclamation liability (usually the point of maximum disturbance) within the term-of-permit area . Prior to disturbing new acreage, the permittee must post additional bond monies. In addition, the permittee is required to post additional bond whenever the cost of future reclamation increases. Release of Liability Under BondsRelease of liability may be approved by OSM/WRCC if a permittee replaces a reclamation performance bond with an acceptable, replacement bonding instrument that assumes all reclamation liability. In addition, as the permittee completes phases of reclamation, the permittee may apply for partial bond release [partial release of liability]. The regulations recognize three discrete phases of reclamation for purposes of bond release. Phase I includes backfilling, regrading, and drainage control. Phase II occurs after topsoil replacement and establishment of revegetation. Phase III requires meeting the revegetation success standards and follows completion of the revegetation responsibility period, provided the site remains in compliance with all other applicable reclamation requirements. Reapplying topsoil may be a Phase I or Phase II reclamation activity.
After a mining company has met all the reclamation requirements of the approved permit, the Act, and the Federal regulatory program, it may apply for full bond release. OSM/WRCC will evaluate the reclamation and may approve release of the reclamation bond if it deems that the reclamation is successful.OSM/WRCC Bond Forms [most common]:
Technical Assistance
For information on how to receive technical assistance with the calculation of reclamation bond amounts, please go to this webpage:
http://www.osmre.gov/bonding.htm
In addition, OSM offers technical training in these and other related topics. For information and schedules, contact the Office of Surface Mining National Technical Training Program (NTTP),1951 Constitution Ave., N.W., Room 210-SIB, Washington, D.C. 20240, Phone (202) 208-2769. To see NTTP Courses, click here.On-site technical assistance on bonding for the Western states within WRCC's region is also available from the Office of Technology Transfer (OTT) at the Western Regional Coordinating Center in Denver, Colorado. For more information, click here.
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12/14/04